The Open and The Week Ahead

 Good morning everyone. I'm hoping this week we will return to a bit more regularity in my posting since there's a lot of interesting events ahead and I'm expecting some relatively big market moves. 

The Open: 

Looking across the markets this morning, a few interesting dynamics with the EUR looking like it had climbed in the Asian session but then fell with Europe at the open. S&P500 looks a little weaker around a 4380 level, and I'd probably have more of a bearish bias today - looks like we are in a consolidating pattern for the tine being. Breaking back above 4400 probably a little more bullish. 

The big FX mover of interest is GBP - there's been a lot of muttering from BoE officials that they are deeply concerned about rising inflation - with Bailey being at the forefront suggesting that a sustained increase in inflation expectations would be catastrophic. What this is leading to is FX traders expecting a rate hike from the BoE this year in what would be a dramatic repricing of hawkish expectations - the £ is naturally higher on the back of this. 

From Bloomberg: Michael Saunders, one of the most hawkish members of the Monetary Policy Committee, suggested in remarks published Saturday that investors were right to bring forward bets on rate hikes. Hours earlier, Governor Andrew Bailey warned of a potentially “very damaging” period of inflation unless policy makers take action.

But at the same time, GBP isn't performing quite as well as you might expect given the noise in the background over the NI-EU border. Brexit negotiator Frost is trying to pressure the EU given that the ECJ has say over any changes to the NI Protocol. Basically, this is setting the stage for a potential trade war in the long-term with dramatic possible ramifications in Ireland. 

Regular readers will know of course that I am a persistent Sterling bear. Does this change my view? 

Not yet - it's possible a rate hike just means an increase to 25bps, which wouldn't actually make the UK any more interesting than a number of other G10 nations, so I don't think "carry trades" will become important yet. But it's worth watching, if the BOE is suddenly one of the most hawkish and aggressive central banks this could be a reason for a significant repricing of GBP higher. 

What else is going on? 

All eyes on the commodities space - I'm watching WTI Crude oil climbing above USD80/bbl in what marks a continuation of the relentless push higher in commodity prices. Beyond that, I think the broader commodity index story of continuous rises is interesting. At some point this must be reflected in margin pressures for businesses! Costs cannot continue to be passed on to consumers forever. 

And it's the same story in the "core commodities" group which covers a broad range of inputs like "lean hogs" and "cotton". I think it's a better measure overall since it's less weighted to oil etc. 

Other than that, there's no story which has particularly lured my attention. So what's going on in the week ahead? 

Well the key event of the week is US CPI data as this will likely drive the narrative over the scale of a potential Fed tapering. If we get a big number here, don't be surprised to see a quicker winding down of asset purchases at the November meeting of the FOMC. If it's a lower number, then it's a win for the doves. I will be doing a full CPI primer later in the week. 

Other than that, we have a lot of central bank speakers from the ECB - with Lane and Elderson speaking today. We get a lot of survey data from Europe too tomorrow. 

In the UK, tomorrow we have the labour force data where we are expecting to see a downtick in unemployment from 4.6% to 4.5%. Yes the furlough scheme has now ended, but it is probably too early to see this reflected in the data. 

In the US, we also have the FOMC minutes on Wednesday. It will be interesting to see how they have accounted for the "all but met" clause of Powell's latest speech. Then to end the week we have US Retail Sales data as well as a couple of other pieces of survey data. 

Last but not least, it's Q3 earnings season baby! So this should provide some interest - we kick off with many of the bank stocks reporting including JPM, BofA, WFC, MS. 

Happy trading all. I will also try to provide a few trade ideas this week - some interesting set-ups starting to form.